An investor purchases shares of common stock directly from a corporation during its initial public offering (IPO), where the proceeds of the sale go directly to the issuing firm. Several months later, the investor sells those shares to another retail investor on a registered stock exchange. Which of the following statements accurately characterizes these two transactions?
- The initial stock purchase occurs in the primary market, whereas the subsequent transaction between investors on the exchange occurs in the secondary market.Cevap
- BBoth the initial purchase and the subsequent sale are classified as primary market transactions because the security originated from an equity offering.
- CThe subsequent exchange sale requires the executing firm to act exclusively in a dealer capacity, trading out of its own inventory with a mark-up.
- DThe secondary exchange trade is cleared directly by the issuer rather than through a registered clearing corporation.
Cevap
The initial purchase is a primary market transaction because proceeds go to the issuing corporate entity, while the subsequent resale on an exchange is a secondary market transaction between investors.
The transaction where the corporation receives the capital is a primary market trade. The subsequent transaction where one investor sells existing shares to another investor on a public venue (exchange) is a secondary market trade.
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Primary vs. Secondary Market Structure
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